Diversity and the Bottom Line
The jury is still out on whether workforce diversity boosts the corporate bottom line, though there’s compelling evidence it might. Some research indicates that the diversity/performance link ultimately depends on specific managerial practices. So, the true question for companies, given today’s demographic realities, is whether they can do an even better job of managing diversity.
During the economic downturn of 2001, some companies put diversity issues on the back burner. “In bad times, the first thing to go out the window is diversity,” consultant Robert Shutter was quoted as saying in 2001. “My sense is that it’s not seen as being essential to the bottom line … anything that’s not connected to profits is subject to removal” (Johnson-Elie, 2001).
More recently, though, there’s been evidence showing a link between diversity and corporate performance. A 2005 study by Standard & Poor’s (S&P) and DiversityInc magazine, for example, revealed that the “Top 50 Companies for Diversity” beat the Dow Jones Industrial Averages and the NASDAQ, remaining competitive with the S&P for a one-year period (Business for Social Responsibility Staff, 2005).
Another study links diversity to higher productivity. The Urban League’s “Diversity Practices That Work” study found that companies with diversity practices in place experienced 18% greater productivity than the U.S. economy overall. And a study from Catalyst – one that looked at 353 Fortune 500 companies – found that companies that had the highest percentage of women on their top management teams enjoyed better financial performance than those that had low percentages (Lockwood, 2005).
Increasing globalization should quell any doubts about diversity’s importance as a management strategy. Such programs are likely to expand so that they'll work throughout the world (“Diversity,” 2003). Diversity has already become a higher priority in the UK. A 2004 report by the organization Race for Opportunity reveals that 78% of UK organizations have a clear vision toward achieving racial diversity, more than twice the number with that opinion in 2001 (38%). Findings suggested businesses that increased their diversity experienced a noticeable impact on their bottom line (43% of respondents) and had improved brand recognition (65%) (“Race for Opportunity,” 2004).
The truth is, however, that most companies have no system for accurately evaluating the impact of diversity on company performance. A study conducted by the nonprofit group Business Opportunities for Leadership Diversity suggests the diversity/performance link is not necessarily a strong one. It found that racial and gender diversity had neither the positive effect espoused by optimists nor the negative effects on group processes of which pessimists warn (Kochan et al., 2003).
The study also found, on the other hand, that “context is crucial in determining the nature of diversity’s impact on performance.” Whereas diversity can have negative effects on performance, this occurs in specific circumstances, such as among teams that are highly competitive with one another. The authors of the study note that “there was some promising evidence to suggest that, under certain conditions, racial diversity may even enhance performance, namely when organizations foster an environment that promotes learning from diversity.”
So, diversity alone might not boost performance, but diversity plus savvy management probably can. The authors recommend, for example, that leaders have the skills necessary to facilitate constructive conflict (Kochan et al, 2003). This suggests that the real question isn’t “What’s diversity’s impact on the bottom line?” It’s “How can we make diversity work well for us?”
It’s an especially important question in the U.S., where both the minority labor force and minority markets are growing dramatically. By 2009, African Americans, Hispanics, Asian Americans and Native Americans will spend more than $1.5 billion annually, an increase of 242% over 1990 spending, while the buying power of whites will increase by only 140%, according to the Selig Center for Economic Growth (Lockwood, 2005).
The purchasing power of Hispanics alone grew 258% from 1992 to 2002, reaching $630 billion. That amount is more than the gross national product of Brazil, Spain, or Mexico. In fact, it represents the ninth largest economy in the world (Gonzáles, 2004). U.S. corporations are scrambling to develop strategies to reach these groups. For example, there’s targeted advertising that features spokespeople with whom minorities can identify. “Corporate America is beginning to understand that Hispanics want people who can communicate with them and buy from them,” said Casey Gonzáles, assistant dean of student affairs and director for the Center of Multicultural Cooperation at the University of Texas at Arlington (Chavez, 2005).
So, in the foreseeable future, the most successful companies are likely to be those that are best able to tap into diverse markets, those both within and outside of the nations where they’re headquartered. It seems the future of diversity has already arrived.
To see the SHRM study “Workplace Diversity: Leveraging the Power of Difference for Competitive Advantage,” click here.
For more on the Race for Opportunity study, click here.
For more on the Business for Social Responsibility report on workplace diversity, click here.
For an article called “Most Corporations Still Missing the Boat,” click here.
For a link to a PDF version of “The Effects of Diversity on Business Performance,” click here.
Documents used in the preparation of this TrendWatcher include:
Business for Social Responsibility Staff. “Workplace Diversity.” BSR Issue Briefs, April 2005.
Chavez, Ivan. “The Hispanic Edge on Career Opportunities.” Hispanic Business Journal, June 22, 2005.
“Diversity Trends: Global Focus, Mainstream Training, Age Issues.” HRfocus, March 2003, p. 8.
Gonzáles, Richard. “Most Corporations Still Missing the Boat.” Hispanic Journal, September/October 2004.
Johnson-Elie, Tanette. “Weakening Economy Tightens Belt on Business Diversity Programs.” Milwaukee Journal Sentinel. NewsBank. October 23, 2001, p. 1D.
Kochan, Thomas, Katerina Bezrukova, Susan Jackson, Aparna Joshi et al. “The Effects of Diversity on Business Performance: Report by the Diversity Research Network.” ProQuest. Human Resource Management, Spring 2003.
Lockwood, Nancy R. “Workplace Diversity: Leveraging the Power of Difference for Competitive Advantage.” 2005 Research Quarterly [www.shrm.org/research]. June 2005.
“Race for Opportunity Launches 4th Benchmarking Report.” Press release. January 7, 2004.
During the economic downturn of 2001, some companies put diversity issues on the back burner. “In bad times, the first thing to go out the window is diversity,” consultant Robert Shutter was quoted as saying in 2001. “My sense is that it’s not seen as being essential to the bottom line … anything that’s not connected to profits is subject to removal” (Johnson-Elie, 2001).
More recently, though, there’s been evidence showing a link between diversity and corporate performance. A 2005 study by Standard & Poor’s (S&P) and DiversityInc magazine, for example, revealed that the “Top 50 Companies for Diversity” beat the Dow Jones Industrial Averages and the NASDAQ, remaining competitive with the S&P for a one-year period (Business for Social Responsibility Staff, 2005).
Another study links diversity to higher productivity. The Urban League’s “Diversity Practices That Work” study found that companies with diversity practices in place experienced 18% greater productivity than the U.S. economy overall. And a study from Catalyst – one that looked at 353 Fortune 500 companies – found that companies that had the highest percentage of women on their top management teams enjoyed better financial performance than those that had low percentages (Lockwood, 2005).
Increasing globalization should quell any doubts about diversity’s importance as a management strategy. Such programs are likely to expand so that they'll work throughout the world (“Diversity,” 2003). Diversity has already become a higher priority in the UK. A 2004 report by the organization Race for Opportunity reveals that 78% of UK organizations have a clear vision toward achieving racial diversity, more than twice the number with that opinion in 2001 (38%). Findings suggested businesses that increased their diversity experienced a noticeable impact on their bottom line (43% of respondents) and had improved brand recognition (65%) (“Race for Opportunity,” 2004).
The truth is, however, that most companies have no system for accurately evaluating the impact of diversity on company performance. A study conducted by the nonprofit group Business Opportunities for Leadership Diversity suggests the diversity/performance link is not necessarily a strong one. It found that racial and gender diversity had neither the positive effect espoused by optimists nor the negative effects on group processes of which pessimists warn (Kochan et al., 2003).
The study also found, on the other hand, that “context is crucial in determining the nature of diversity’s impact on performance.” Whereas diversity can have negative effects on performance, this occurs in specific circumstances, such as among teams that are highly competitive with one another. The authors of the study note that “there was some promising evidence to suggest that, under certain conditions, racial diversity may even enhance performance, namely when organizations foster an environment that promotes learning from diversity.”
So, diversity alone might not boost performance, but diversity plus savvy management probably can. The authors recommend, for example, that leaders have the skills necessary to facilitate constructive conflict (Kochan et al, 2003). This suggests that the real question isn’t “What’s diversity’s impact on the bottom line?” It’s “How can we make diversity work well for us?”
It’s an especially important question in the U.S., where both the minority labor force and minority markets are growing dramatically. By 2009, African Americans, Hispanics, Asian Americans and Native Americans will spend more than $1.5 billion annually, an increase of 242% over 1990 spending, while the buying power of whites will increase by only 140%, according to the Selig Center for Economic Growth (Lockwood, 2005).
The purchasing power of Hispanics alone grew 258% from 1992 to 2002, reaching $630 billion. That amount is more than the gross national product of Brazil, Spain, or Mexico. In fact, it represents the ninth largest economy in the world (Gonzáles, 2004). U.S. corporations are scrambling to develop strategies to reach these groups. For example, there’s targeted advertising that features spokespeople with whom minorities can identify. “Corporate America is beginning to understand that Hispanics want people who can communicate with them and buy from them,” said Casey Gonzáles, assistant dean of student affairs and director for the Center of Multicultural Cooperation at the University of Texas at Arlington (Chavez, 2005).
So, in the foreseeable future, the most successful companies are likely to be those that are best able to tap into diverse markets, those both within and outside of the nations where they’re headquartered. It seems the future of diversity has already arrived.
To see the SHRM study “Workplace Diversity: Leveraging the Power of Difference for Competitive Advantage,” click here.
For more on the Race for Opportunity study, click here.
For more on the Business for Social Responsibility report on workplace diversity, click here.
For an article called “Most Corporations Still Missing the Boat,” click here.
For a link to a PDF version of “The Effects of Diversity on Business Performance,” click here.
Documents used in the preparation of this TrendWatcher include:
Business for Social Responsibility Staff. “Workplace Diversity.” BSR Issue Briefs, April 2005.
Chavez, Ivan. “The Hispanic Edge on Career Opportunities.” Hispanic Business Journal, June 22, 2005.
“Diversity Trends: Global Focus, Mainstream Training, Age Issues.” HRfocus, March 2003, p. 8.
Gonzáles, Richard. “Most Corporations Still Missing the Boat.” Hispanic Journal, September/October 2004.
Johnson-Elie, Tanette. “Weakening Economy Tightens Belt on Business Diversity Programs.” Milwaukee Journal Sentinel. NewsBank. October 23, 2001, p. 1D.
Kochan, Thomas, Katerina Bezrukova, Susan Jackson, Aparna Joshi et al. “The Effects of Diversity on Business Performance: Report by the Diversity Research Network.” ProQuest. Human Resource Management, Spring 2003.
Lockwood, Nancy R. “Workplace Diversity: Leveraging the Power of Difference for Competitive Advantage.” 2005 Research Quarterly [www.shrm.org/research]. June 2005.
“Race for Opportunity Launches 4th Benchmarking Report.” Press release. January 7, 2004.